When I last wrote about troubled holiday company Thomas Cook Group (LSE: TCG) on 22 May, the share price stood close to 12p. The day after, the firm revealed it had received a “highly preliminary and unsolicited” indicative offer from Triton Partners for its Northern Europe business, comprising its tour operator and airline in Norway, Sweden, Finland and Denmark.
Volatile price action
The directors pledged to evaluate the offer along with “multiple” other bids either for the whole or parts of the airline business. In the excitement, the shares went as high as about 19p by 10 June. But on that day, Thomas Cook revealed it’s in discussions with its largest shareholder, Fosun International Limited, following a preliminary approach regarding a potential offer for the Thomas Cook tour operator business.
But since then, the speculative froth has blown off the share price a bit and it’s back down at about 15p as I write. Investing in distressed shares like this one is not for the faint-hearted. The volatility is frightening and I still think things could go either way in terms of shareholder outcomes from here.
Back in May, I reported on the grim outlook for the business characterised by competitive pressures, an uncertain consumer environment, and higher fuel and hotel costs. Cash is flowing out of the business and debts are piling up. On top of that, the holiday sector is highly cyclical and I reckon things could get a lot worse if we see a general economic downturn.
A precarious position
Thomas Cook faces an existential crisis, in my view. The firm’s position seems precarious, and I don’t think any potential suitor will be prepared to pay very much for any of the company’s assets. One shareholder risk is that any future tangible offer will value the company below where the share price sets the valuation today. Even at the recent 15p, I reckon the shares carry substantial risk to the downside for shareholders.
In general terms, I think there’s much more to successful investing than focusing on firms that have just demonstrated their ability to fail in some way. I know fallen share prices can be tempting, and sometimes valuations can look low. But what we’re really doing when we buy such shares is betting on a recovery in the business.
It’s a tall order for a business to turn itself around. Most don’t. If you require a turnaround to ensure a successful investment outcome, what you’re really asking for is a complete change in trend for the operations, finances and share price. Unlikely. Especially, I’d argue, with a distressed cyclical such as Thomas Cook Group.
Despite the preliminary interest shown by other firms, I’d still avoid Thomas Cook and look for better investments elsewhere. But as a group, I’m wary of all cyclical companies right now.
